Global and institutional drivers of wage inequality between and within firms

Abstract

Rising wage inequality in wealthy countries is disproportionately driven by widening differences in pay between workplaces, through increasingly homogenous workforces as well as widening differences in the pay of similar workers. While this is found consistently across countries, the variation in trends highlights the need to study institutional settings. This paper uses cross-national representative European data from the Structure of Earnings Survey to study the trends in wage inequality over time between and within firms, linking these to changes in structural and institutional factors. Indeed, common structural changes such as globalization and digitalization contribute to rising wage inequality across otherwise similar workers within and between establishments. However, the institutional context plays an important role: where employers’ pay setting is constrained through more biting minimum wages or multi-employer collective bargaining, this inequality is compressed and does not grow as much.